As we crest the one-year mark of the onset of COVID-19, Congress has passed an additional relief package in the form of the American Rescue Plan (ARPAA) Act of 2021. The ARPAA is scheduled to be signed into law by President Biden before the enhanced unemployment benefits previously extended by the Consolidated Appropriations Act, 2021 (CCA) expire on March 14. This legislation contains several key provisions that could impact your personal and business tax and financial planning.
Another round of direct payments will be sent to taxpayers with Adjusted Gross Income (AGI) less than $75,000 for single filers and $150,000 for joint filers. The maximum payment is $1,400 per adult and qualifying dependent, bringing total potential payments to $2,000 per person when combined with the $600 payments that were made under the CCA. The ARPAA expands the definition of qualifying dependents for whom taxpayers are eligible to receive payments. Taxpayers previously only received payments for dependents age 16 and under. The expanded definition now includes children who are either under the age 19 at the end of the tax year, full-time students under the age of 24 at the end of the year, or permanently and totally disabled at any time during the year, as well as qualifying relatives such as aging parents that a taxpayer might be supporting. Compared to income phaseout thresholds for payments made under the CCA and Coronavirus Aid, Relief, & Economic Security (CARES) Act, the AGI phaseout thresholds under the ARPA are lower, meaning that payments taper off faster (see the graph below). If you’ll be receiving this additional stimulus payment and are considering options for how to use the funds, review our suggestions as outlined in our prior communication discussing the original stimulus payments authorized by the CARES Act.
The ARPA also temporarily expands the child tax credit for 2021 to a fully refundable $3,600 for children age five or younger and $3,000 for children ages six to 17, with phaseouts beginning when AGI reaches $75,000 for single filers and $150,000 for joint filers. In addition to increasing the dollar amount of the credit, the expanded credit is fully refundable, compared to the standard child tax credit of which up to $1,400 could be refundable and which requires at least $2,500 of earned income. The expanded credit also covers 17-year-old children rather than stopping after age 16. The IRS plans to periodically advance the credit to qualifying taxpayers, meaning that monthly payments are likely to hit their bank accounts from July through December 2021, with the rest of the credit claimed when they file their 2021 tax returns. Taxpayers who are phased out of the expanded credit may still claim the regular child tax credit of $2,000 per child subject to AGI thresholds of $200,000 for single filers and $400,000 for joint filers.
With federal unemployment benefits about to expire, the ARPA does extend those payments of $300 per week through September 6. It also waives federal taxes on the first $10,200 of unemployment benefits collected in 2020 ($20,400 for joint filers) subject to AGI limits of $150,000. Some states do tax unemployment benefits, and they may not waive the tax to align with this new federal provision.
On the student loan front, the ARPA provides tax-free treatment to taxpayers who have student loans discharged through 2025. Absent this provision, debt cancellation is usually treated as taxable income.
From a business standpoint, the ARPA provides additional funds for the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) Advance Grants Program, among other grants. It also extends the Employee Retention Credit (ERC). Some of these provisions are interrelated, so we recommend consulting your tax advisor to determine the optimal tax strategy for your business. Notably, proposals to increase the minimum wage were not included in the final legislation.
As always, the Sequoia team is available to help in determining how the ARPA and other recent legislation might impact you based on your personal circumstances and goals.